The Construction Industry Scheme (CIS) requires contractors to deduct tax at source on payments made to a subcontractor. However, the subcontractor can register with HMRC for gross payment status to stop the tax at source deduction. This makes a subcontractor with the gross payment status more attractive to contractors to deal with, as well as improving the subcontractors cash flow given they will not have the deduction imposed on any invoices raised.
A recent case, JP Whitter (Waterwell Engineers) Ltd v HMRC, was in relation to this CIS gross payment status. The Supreme Court ruled in HMRC’s favour in that HMRC do not have to take into consideration the serious detrimental effect on a taxpayer’s business when deciding to cancel the CIS gross payment status.
Reasons for an appeal
The taxpayer appealed HMRC’s decision, arguing that HMRC should have considered the adverse impact the revocation would have on their business. The company stated that major customers would take their business elsewhere if the status was revoked, resulting in a 60% drop in turnover and the loss of 80% of the employees.
Financial impact is not a factor in revoking a gross payment status
The First Tier Tribunal (FTT) agreed with the tax payer. However the Upper Tribunal (UT) ruled in HMRC’s favour, with the Court of Appeal and subsequently the Supreme Court upholding the decision. The reasons being that the rules governing CIS gross payment status do not take into account the impact on the taxpayer’s business, nor their financial position. Furthermore, because the company had made late payments of PAYE in 2009, 2010 and 2011, it was deemed that the cancellation was proportionate as the adverse impact was a predictable consequence of the non-compliance in prior years.
Although a disappointing outcome for those in the construction industry, it highlights how important it is to get a good accountant to ensure that your business is kept up to date to avoid any chance of the CIS gross payment status being revoked. For more information, contact us at Clever Accounts.